The Hong Kong Housing Bubble Implodes

Everything suddenly goes the wrong way.

As in so many housing bubbles, soaring apartment prices feed epic high-rise construction booms with the promise of big profits backed by easy money. Years can pass between initial plan and completion, and now the fruits of Hong Kong’s epic construction boom are hitting the market just when prices are crashing and sales collapsing.

In the first quarter, the number of housing units under construction set a new frenetic record: 13,300, the South China Morning Post reported, citing the Transport and Housing Bureau. By comparison, in all of last year, 14,200 homes were under construction. In 2015, 11,300 new homes were completed. This year, the number will jump 61% to 18,200! Over the next three to four years, 92,000 new homes will hit the market.

And this is happening just as home sales are plunging. According to the Rating and Valuation Department’s April Property Review, sales for January and February – the most recent months included – plunged 69% from a year ago to 3,852 homes. February’s 1,807 home sales was a 25-year low.

Prices have already taken a hit. After peaking in September last year, they’ve fallen every month since, including in March, when they fell 1.3% from February, according to the Rating and Valuation Department. Over those six months, home prices have plunged 11.7%.

And there’s more gloom on the way. The SCMP: “An increasing number of property analysts expect home prices to fall in the next two years, with Nomura predicting they will fall by a further 19% by the second quarter of next year.”

With prices careening lower, the number of mortgages with negative equity — when the outstanding amount exceeds the value of the home — is suddenly jumping. And that’s the bane of any housing market. When it takes on large proportions after hefty price declines, that’s when homeowners abandon efforts to even make mortgage payments, and when lenders are starting to be at risk.

Last December, three months into the Hong Kong housing bust, there were still only 95 cases of negative equity. But by the end of March, their number had exploded by a factor of 15 to 1,432 cases, the highest since 2011, the Hong Kong Monetary Authority, the city’s central bank, reported today. The aggregate value of mortgages with negative equity soared by a factor of 12 to HK$4.92 billion (US$634 million).

But it’s just the beginning after a few months of price declines. “Hong Kong’s record in negative equity cases stands at 105,697, set at the height of the Severe Acute Respiratory Syndrome (Sars) epidemic in 2003,” the SCMP explained. But this time, there’s no Sars epidemic to blame.

Credit problems are already appearing: The number of foreclosed homes has doubled from a year ago to about 130. And this too is just the first feeble beginning. These things take time to build up and play out.

Yet prices are still 58% higher than at the prior crazy bubble peak in 1997, and pandemic affordability is a huge problem as middle-class families have trouble buying even a tiny apartment. So the government has decided to tackle the problem and allow, or even encourage, the construction boom to put excess supply on the market and bring down the housing mania. It appears to be working.

The SCMP cited Financial Secretary John Tsang Chun-wah as saying that “property prices are still out of tune with the overall economic situation and general affordability.”

And so prices would have to drop a lot more. The overall economic uncertainty doesn’t help. Mainland Chinese investors – now tangled up in their own market turmoil and collapsing wealth management schemes – had piled into Hong Kong real estate even more so than they’ve piled into Vancouver and other cities around the world apparently. And now they’re getting second thoughts as prices are heading south, liquidity is drying up, and another portion of their wealth is evaporating.

Last year, $674 billion fled China. The Institute of International Finance estimated that $538 billion would flee China this year. Reserves have plunged 20% to $3.2 trillion. Much of it is illiquid and cannot be used to stabilize the currency. If the Chinese fret that the yuan could fall in a “disorderly” manner, capital flight could accelerate. And this would have broader ramifications. Read… China’s “Lehman Moment” or Decades of Japan-Style Stagnation?

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42 comments for “The Hong Kong Housing Bubble Implodes”

CENTURION

Apr 29, 2016 at 7:39 pm

I lived 4 years in Hong Kong.

When the people on the mainland flee what is coming, these “empty” apartments will fill up fast. Hong Kong has a “separate but equal” government to Mainland China, but when this world wide recession plays out, the legal and illegal migration to Hong Kong will fill up these empty locations.

The question is WHAT will the Communist Party of China do? Let it happen or enforce the People Law against greedy yellow running dog Capitalist Pigs? Leaders do not go quietly into that good night, and once they put the full-automatic machine guns at the borders and ports (illegal in America unless you are on the protection squad for the politicians) then party is over.

The best thing China can do is exterminate at least 500 Million of their useless eaters (as Henry Kissinger calls them). Then, enforce the Peoples Law and require them to work to make cheap plastic toys for white toddlers in Europe, in the factories owned by the Celestial Leaders.. It they refuse to volunteer for these positions?…..put a bullet in their head. Remember, Chairman Mao said power comes from the end of a rifle. Praise Mao. Man of the People.

Leadership, world-wide, is getting soft and pathetic. Strong Leaders create Strong Nations and they need to direct the peoples. If the peoples do not cooperate…..kill them. I am so tired of this “freedom” and stuff. If the peasants and voters don’t do what is best for them……kill them.

Truth

Apr 29, 2016 at 8:27 pm

Your joking right? If your not then u are a foolish mass murdering psychopath…no educated person one wants a strong leader to do what is best for them…Mao was a revisionist tyrant, where is your compassion for human life?

Thomas Malthus

Apr 30, 2016 at 12:16 am

Are you insane?

I have lived in Hong Kong for over 20 years and have businesses in HK and China.

You haven’t the slightest clue. Did you spent the 4 years in a sleazy girlie bar in Wanchai?

roddy6667

Apr 30, 2016 at 9:35 am

I agree with you. Has he been in HK recently? I doubt it. Most likely a troll.

night-train

Apr 30, 2016 at 3:10 am

Tim Tebow is so disappointed in how you have turned out. Even Steve Spurrier is saying “What’s wrong with this guy?”. Most commenters at Wolf’s site look for reasonable solutions to common problems. You are acting as a troll, just trying to stir something up. Or, you are a seriously dented can in need of serious professional help.

Wonderfully put, indeed. The only ‘tweak’ I would make to your essay is that I, Randy Durd, would be in charge of this entire world of weaklings. I know, I know, it’s going to be a tough job but, as they say, . . . .” Hey, it’s either ME or OBAMA. Which do you prefer? You don’t think Obama’s going quietly into that good night do you?

walter map

Apr 30, 2016 at 10:28 am

“If the peoples do not cooperate…..kill them.”

The trick is to get people to vote for leaders who are out to exterminate them, regardless of party preference. That’s where you come in.

Randy Durd

Apr 30, 2016 at 11:07 am

We’ve been doing that. We voted for the politicians that would exterminate us. If you think about it, you would agree that, YES, they really would. For having no official inflation, the price of my food is going up really fast. The poor have to eat junk food just to survive. How long are they going to last?

walter map

Apr 30, 2016 at 1:04 pm

To be sure, the door to the Shadow Gallery is a heavy one, but it it not actually locked.

TheBloomIsOffTheRose

Apr 30, 2016 at 3:56 pm

“If the peoples do not cooperate…kill them.” In America, people are “exterminated” through slow kill methods: homelessness; poverty; food deprivation; water poisoned by pharmaceuticals, agricultural chemicals, heavy metals, chlorine, fracking chemicals; food depleted of nutrients and laced with additives and toxins; air pollution; consumables made of toxic materials; a rapacious and increasingly ineffective sick care industry; militarized police (okay, that’s fast kill); increasingly powerful and ubiquitous non-ionizing radiation from cellular and microwave transmissions; ionizing radiation from Fukushima and other leaking nuclear plants; disinformation campaigns that make it increasingly difficult for people to protect themselves and loved ones – to know the truth about anything; absent enforcement of existing health and safety laws; the great American wealth transfer and resulting lowering of the standard of living to poverty levels for millions; a cultural shift that cold-hardheartedly and exclusively holds individuals accountable for their circumstances, at once isolating them from the assistance or support of others while relegating them to the dust heap; and other means.

Bluesky

May 1, 2016 at 6:21 am

Are you for real? This is 21 century.
Things are not as simple as you may think.

supermundane

May 1, 2016 at 8:50 am

Aren’t you a charmer.

Sickening doesn’t begin to describe your screed. Who says, if your disgusting vision came to pass that you wouldn’t be deemed a ‘useless eater’? – you’ve certainly got all the traits of a worthless human being in my books.

Pakilolo

May 1, 2016 at 10:54 am

What is a Trump voter doing on this website?

greedy yellow running dog Capitalist Pig

May 1, 2016 at 11:43 am

You got that right, pal. But the problem with “exterminating at least 500 Million of their useless eaters” (LoL, OMG) is they’ll require real estate, too. Then what do you do with them?

Are these types of asset bubbles inevitable? What is wrong with the regulators that they keep allowing these kinds of situations to develop? We don’t think it repressive when reasonable speed limits are imposed for vehicle operation on the public roads to minimize accidents, so why not analogous limits on the rate of building construction, for example by restricting the issuance of building permits? Asset appreciation beyond some reasonable rate is obviously irrational leading to mal-allocation of capital and can only end in disaster. More than ample historical data is available to establish safe limits, and statistical tests have been developed to identify asset bubble creation. http://www.wsj.com/articles/SB10001424052702304626304579507413517999956

MC

Apr 30, 2016 at 1:32 am

Very very few legislators can resist the Concrete Song by the Bubblicious Mermaid.
My brother recently told me the mega-mall near where he works is almost finished. It has room for 165 shops plus a couple big box stores. Ikea is a stone throw away.
There’s another mega-mall less than 2 miles away which is already emptying: the big box store around which it’s built will close down later this year and the shops in it are not doing well by any stretch of imagination, so they’ll probably take up the one year free rent and utilities offer from the new mall owners (intriguingly enough, a Swedish group).
The muni has already figured out what to with the “old” mall: raze it to the ground and build mini McMansions. In an area which still has a glut of similar housing left over from 2005-2009 which doesn’t want to go away.
You honestly cannot make this stuff up even if you tried.

From my mountain abode, I’ve seen the valley underneath fill up with concrete in the past years. Comatose sales and a glut in supply have neither stopped the cranes nor driven prices down.
I spoke with a couple who put up their house for sale and ran away. They told me it’s now worse than living in a large city. No new roads were built hence the traffic has become nigh on unbelievable (something I can vouch for). Sewers are undersized and drainage has been destroyed so each time there’s a thunderstorm the roads get flooded. Maintenance is carried out in haphazard fashion, if ever: public parks are overgrown with weeds, roads look like they’ve been through a civil war and streets are rarely, if ever swept.
The muni is flat out broke due to a series of misbegotten grandiose building projects and need quick cash, preferably lots of it, to avoid the government commissars from taking over. Any speculator is welcome as long as he can pay fees.

Randy Durd

Apr 30, 2016 at 11:12 am

Good point. The oldest mall in town is going under. Too much crime and too little demand for their products. Sears is pulling out of another mall here which will kill that mall as well. Again, crime and demand. The city milked some Bama cash from the Feds to fix the roads and the entire area is torn up, all at once to repave roads and make it easier to get into those two malls that are closing. I guess my grandkids are paying for that, though.

Edward Hines

May 3, 2016 at 8:24 pm

Where do you live? Seriously.
Why so cryptic? Let us know.

walter map

Apr 30, 2016 at 10:24 am

“Are these types of asset bubbles inevitable?”

Depends on the people running your monetary policy. Clearly it’s a mistake to make severe pathologies a job requirement.

Randy Durd

Apr 30, 2016 at 11:14 am

It’s the inevitable result of the Bank/Government cabal passing laws, rules and executive orders to make it easier to profit from the Federal Reserve/Stock market and pay themselves huge bonuses.

Randy

Apr 30, 2016 at 11:17 am

You can’t put controls like that into play when you have a fiat paper currency financial system! You have to start out with and MAINTAIN a bona fide medium of exchange (one based on human labor represented by PM) because otherwise, the inflation (gradual decrease in the perceived purchasing power of a fiat paper currency) will skew the markets all over the place. It’s like trying to wrap some Jello up in rubber bands; it will just keep on popping out each place you try to seal up with more rubber bands!!
Once any amount of fraud at all creeps into your medium of exchange, it begins to fall apart, and then more and more people try to game the system to make a profit before it dies.
How can there be any “asset appreciation” if the medium of exchange remains constant? Those bogus ideas are just a ruse to confuse the people about the issue that the fiat paper currency is dying. When the PPP is declining, it takes more fiat paper currency to buy the same amount of goods and services as before. There is an equation there, in case you didn’t see that before.
OK, I’m making just way too much sense here now, so I will sit back down and shut up.

gearheadedone Randy

Apr 30, 2016 at 11:20 am

Whoopsie there! PPP means perceived purchasing power!

ANON

Apr 29, 2016 at 9:09 pm

“These things take time to build up and play out.”

Respectfully disagree, Wolf.
I think on they way up, they do indeed take their sweet time, until the exponential reaches gargantuan numbers during blinks of an eye. However, these same things do not take their sweet time at the beginning of their descending logarithmic decay. They go fast from the start.

night-train

Apr 30, 2016 at 3:01 am

ANON: Failing schemes can certainly unwind quickly. On the other hand, I am often amazed at just how long a rotten structure can stand.

d

Apr 30, 2016 at 3:06 am

Depends on who is propping up the rotten structure, for what reason.

Randy Durd

Apr 30, 2016 at 11:18 am

When you prop them up with flying buttresses they’ll keep going for a long time. Witness the asset buildup (value based of course). Totally propped up. The wealth effect.

Alameda county is seeing some interesting changes. I used to live in the city of alameda and was recently visiting. Wow, the rate of development is astounding! And the stories of eviction notices seems rampant. “new management” has come to town and they’re not playing around. The marina where I kept my boat just evicted 9 people for no reason. The guy who bought my boat was not allowed to transfer to old my slip. So he has to take it elsewhere. Glad I left the place.

Petunia

Apr 30, 2016 at 12:24 pm

You can add rentals in NYC and Houston.

Chuck

Apr 30, 2016 at 3:27 am

Chinese are probably the best in the world at inflating bubbles. “Yet prices are still 58% higher than at the prior crazy bubble peak in 1997, and pandemic affordability is a huge problem as middle-class families have trouble buying even a tiny apartment.” This affordability problem is common for every housing bubble. But in Hong Kong there is one reason, why a bubble bursts easier than in other housing markets. What keeps a bubble alive in an ordinary city is the fact that people simply do not want to move away from their hometown just to save money. Honk Kong is different: it has a fertility rate below 1. Its population depends on immigration. If you ask too much for a flat, people will simply refuse to move to that city.

MC

Apr 30, 2016 at 4:04 am

I’d make a joke about HK SUV drivers providing a natural population control service here but we are above such things.

HK has such low fertility rates for the simple reason it’s a place where many want to go working but few want to live. You go to HK to make money, build a career, make a name for yourself but not raise a family.
It has been this way since the British Crown still ruled over it.
Even humble Mainland immigrants go there for the money.

Now, you put the fingers on one of many “strange” things about what happens when Chinese buyers appear on any housing market: they seem almost desperate to overpay. By “overpaying” I mean they have no problems paying more than the asking price. 5-6% more is common for highly desirable properties, at least in bubble markets, but Chinese buyers will offer a double digit extra on a pretty much no questions asked basis. Even Russian oligarchs at the height of their power and wealth did not behave that way.
I am pretty sure Mainland buyers in HK behaved exactly the same way: the apartment costs one million HK dollars but there are a few interested buyers? They’ll offer an extra 100,000 cash, right away, to close the transaction there and now. Given how good Chinese are at negotiating with foreign customers, it hints they have a deeper scope in mind.

walter map

Apr 30, 2016 at 10:06 am

“Everything suddenly goes the wrong way.”

Still, corporatists do have large numbers of gullible peepul chasing their tails, all up and down the food chain, and that’s the important thing.

MC

Apr 30, 2016 at 11:47 am

You have to consider one thing: right now the scramble is not merely for yield. It’s for wealth preservation. In times of yore investment grade sovereign and corporate bonds served the purpose. Right now… well Mr Richter wouldn’t be writing these pieces if things still worked as in the 90’s.

Chinese savers know better than anybody else how crooked their own financial system is. That’s one of the reasons they piled into real estate. An apartment in Shenzen is the equivalent of 90’s German bonds and a home in Vancouver the equivalent of an offshore bank account.
Anything that helps maintain wealth is more than welcome.

Differently from Westerners the Chinese have a deep seated distrust of their own institutions. They milk the system to make as much money as possible now but plan for when those institutions will be unable to protect their wealth or, like it’s happening in the West, their savings will come under direct attack by those entrusted with defending them.
In a way they resemble “gold bugs”, with the difference they don’t preach some imminent collapse leading to a Mad Max world. They have the certainty, supported by millenia of history (China is one of the two cradles of civilization), something will go very wrong sooner or later and it’s better to start preparing right now.

While I don’t believe in housing (a long string of governments using houses as ATM’s has taught me that), I agree with their sentiment almost wholeheartedly.

walter map

Apr 30, 2016 at 4:51 pm

“It’s for wealth preservation.”

Survival is a time-honored financial strategy, practiced by billions worldwide.

Wan Ghazali Wan Abdullah

Apr 30, 2016 at 9:06 pm

I am just wondering on the scenario, let say the housing bubble in Hong Kong explode, will it has the same impacts on Asean as Greece to Europe?

d

May 1, 2016 at 1:51 am

“will it has the same impacts on Asean as Greece to Europe?”

Worse.

Similar was at the root of the 97 events.

Financially HK and the Mainland are now to close.

The communist central planners are juggling to many glass balls, and still adding more.

When they finally drop one, their assistants fail to catch, all hell is going to break loose in SE Asia.

One of the easy ways out for mainland china, is war.

Hence the chinese aggression, and resources grabs, on the Philippine and Borneo coasts.

They want war with Japan, they will settle for an easier starting point, the US backed Philippines. As it will be easier for the chinese to organize a “False flag” act blamed on the Philippines.

I am currently living in Hong Kong. I can tell you for a fact that some of the high end real estate has not collapsed 11.7% from the peak. The number maybe a median or average decline I do not know BUT i can tell you some high end real estate has dropped 35-40%. The mainland money has been mainly involved in this part of the market because of the Large Value. The larger the value the more cash they could move out. Easier to explain a usd10M purchase than 10 X 1M purchase when you say its a family home!!!